7 Steps for Developing Your Own Trading Strategy

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

There is a saying that a trader needs to “plan the trade” and then “trade the plan”. This is perfectly true and having a plan gives traders more confidence about the outcome of a trade.

Trading is a game of probabilities. It is not possible to have one hundred percent winning trades, and whoever thinks this about the Forex market, then he/she is simply not a realistic person.

How to Develop a Forex Strategy

A proper trading plan should have both technical and fundamental aspects considered. It all starts with the fundamental analysis.

1. Check the Economic Calendar

The first and foremost thing is to check the economic calendar for the week ahead. This is something that should be done over the weekend when the market is close and it gives a general idea about the main events for the week ahead.

Based on this events, some currencies may be avoided this coming week. To give you an example, if in the week ahead the NFP (Non-Farm Payrolls) is released in the United States, then the whole trading week ranges are most likely to form on the U.S. dollar pairs.

The ideal tool to trade a range is an oscillator, looking at divergences between the actual price and the oscillator. Also, the U.S. dollar may be totally avoided, and trading crosses will be a safer bet ahead of a U.S. dollar driven economic event.

2. Choose the Currency Pairs to Trade

The next thing to do is to choose the currency pairs to trade. The Forex dashboard has tens of currency pairs available for trading, but one cannot trade them all.

This should be a due-diligence process that considers both technical and fundamental factors. The fundamental ones are already considered as they are the outcome of the previous step.

For example, in a trading week that has the Inflation Letter in the United Kingdom, one may want to skip the GBP pairs due to the high volatility expected. Or, chose the GBP pairs, exactly for the same reason.

It is recommended to trade three to five different currency pairs to have a well-diversified portfolio. Technical setups may help to find the right currency pairs too.

3. Decide How Much to Trade

Volume is key in trading in general and in Forex trading in particular. Rookie traders will always fall into the trap of overtrading and will end up receiving a margin call from their broker.

For every trade, a margin is blocked in the trading account. Traders need to find the balance between the free and available margin and the right exposure to any currency pair and trading environment.

After the trade is open, if the market goes against the plan, the available margin in the trading account keeps shrinking. The idea behind this step is to open so many trades so the available margin is still enough in a worse-case scenario.

4. Define the Risk

Everyone knows that the key to successful trading stays with a proper risk-reward ratio. What few know is what is the proper ratio?

It is considered that 1:2 or 1:2.5 is a realistic approach to Forex trading. This means, risking one pip to get two or two and a half pips profit.

It gives traders an edge as for every winning trade, even if the following two will be losers, the balance is not affected. Keep it realistic is a good approach. Not that there are not r:r ratios like 1:10, but such trades are quite rare and one cannot plan such an outcome.

5. Avoid Correlations

This should be part of any money management plan: avoid correlations. Correlations can take various shapes in Forex trading.

If there is a risk-on move, for example, the market will move as a whole: the EURUSD, GBPUSD, AUDUSD and NZDUSD will move to the upside, while the USDCAD is moving to the downside. Going long EURUSD and GBPUSD at the same time is like going long EURUSD two times.

Basically, instead of diversifying the portfolio and the exposure, one is overtrading. Overtrading should be avoided.

6. Realistic Expectations

Forex trading attracts retail traders because of the possibility of gaining big in a relatively short period. This is true, it is possible, only that it is rarely happening.

When it is happening, it is not the result of proper trading, but of chance. The second time won’t be the same and all winnings will be wiped out if trading continues.

A realistic approach is to allow the trading account to grow. One may have good and bad trades, positive and negative weeks, or even positive and negative months.

If traders understand that this is normal, it is ok to lose, then trading is easy. What is not ok is to think of trading as a get-rich-quick thing, as it is not.

7. Trade Your Plan

If you bothered to make a plan, you better trade it. Unfortunately, this is more difficult to be done than said.
Many times, traders make a sound plan, but the execution part fails completely. This is because market psychology is an important factor in the overall trading process.

Market moves as the result of people’s actions. Most of the times these moves make no sense, and traders get caught in the wrong direction.

Sometimes it seems that the price is a bargain and a new trade is taken. This is deadly as the moment the trading plan is broken, the account is in danger.

Consider this: a proper trading plan like the one discuss here should risk only a proportion of the trading account each week. To wipe out a trading account, one would need multiple bad weeks in a row.

Chances or probabilities for this to happen are quite slim for the dedicated trader. Remember, trading is a probabilities game and the successful traders are not the ones that are more active, but the ones that trade realistic setups.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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